Wednesday, April 30, 2008

So, today a second US aircraft carrier has entered the Persian Gulf to "send a message to Iran," presumably about their supposedly bad behavior in Iraq. However, Juan Cole reports today that a major spokesman in Najaf for Moqtada al-Sadr, the figure the Iranians are supposedly supporting and arming against the al-Maliki government has just denounced Iran for supporting the long-term security agreement in negotiation between the al-Maliki and Bush governments, although this denunciation was in Arabic in an Arabic newspaper. This supports Cole's long-time contention that Iran is more closely allied with al-Maliki and his ally, al-Hakim, who leads the SIIC, and spent many years in exile in Tehran. In the meantime the NY Times reports that there has not been any increased flow of arms from Iran to Iraq and that it appears that they arm many militias on all sides, also a contention of Cole's (http://www.nytimes.com/2008/04/26/world/middleeast/26military/html?ref=middleeast).

So, the question is: Are the Bush people unable to read Arabic and therefore do not know what they are doing? Are they being consciously taken in by al-Maliki and his allies (perhaps because those guys speak English and the al-Sadr people do not),who are telling them that they are not allied with Iran, when they clearly are? Or are they consciously lying about what is going on to provide an excuse for beating up on Iran over its nonexistent nuclear weapons program or to provide election fodder for McCain by whipping up anti-Iran war hysteria based on garbage?

Tuesday, April 29, 2008

I have only read a hundred pages of Naomi Klein's shocked doctrine, but I thought that it was a very valuable work so far. It should not be judged either as an work of economic history as an all-encompassing theory of capitalism.

Even so, pointing out the commonality between New Orleans, Chile, and Iraq was very valuable. Making such a point does not exclude a certain degree of voluntarism associated with capitalism. Rather, it exposes an unseemly side of capitalism that is not frequently discussed.

The connection between the dreadful psychological experiments in Montréal and Hayek in Chile is not necessarily fanciful.

The author was grateful that I pointed out to her that Hayek spent the last years of his life developing The Sensory Order, a book that expanded on the ideas of Donald Hebb, who began the work that culminated in the atrocious psychological programming of Ewen Cameron.

I am halfway through another fascinating book, written by two very conventional economists on the history of world trade.

Findlay, Ronald and Kevin H. O'Rourke. 2007. Power and Plenty: Trade, War, and the World Economy in the Second Millennium (Princeton, NJ: Princeton University Press).

I have not yet reached the period of the Industrial Revolution, so thoroughgoing capitalism was not yet part of the story. The following quote suggests the flavor of the book:

xviii-xix: "The greatest expansions of world trade have tended to come not from the bloodless tatonnement of some fictional Walrasian auctioneer but from the barrel of a Maxim gun, the edge of a scimitar, or the ferocity of nomadic horsemen .... For much of our period the pattern of trade can only be understood as being the outcome of some military or political equilibrium between contending powers."

Monday, April 28, 2008

In yesterday's Style section of the Washington Post there was an article by Monica Hesse, "Can You Handle It? Truth, Better Yet: Do You Know It When You See It?" The main thrust of the article is how people believe things even when they hear them denied, and how misinformation is everywhere, especially on the internet in Wikipedia and blogs, and so forth. But, what concerned me more than this obvious, point, is that students are apparently seriously using only the internet, especially Wikipedia, and abandoning libraries and the reading of books in droves.

I am more aware of this than usual, being in the middle of grading term papers, and seeing ones with nothing but websites with incomprehensible names as sources. Quotes from students in the article make it clear that many find it annoying when a professor demands that they use a book as a source, and many think Wikipedia is a fully sufficient source, and many never set foot in a library. Yes, Wikipedia does not do too badly compared to Encyclopedia Britannica Online, 4 found errors for every 3 in EBO, but Wikipedia remains subject to interested parties manipulating it for truthiness or wikiality, with the resulting misinformation getting spread far and wide and widely believed. Just how many people think that Iran is out to get nuclear weapons and that al Qaeda was involved in 9/11? And if you read Wikipedia entries about guns, they look like they were written by John Lott or his buddies.

Sunday, April 27, 2008

I was talking to a Costco manager who told me that sales of most items are flat, but liquor sales are brisk.

The New York Times reports on a phenomenon that I have heard of locally -- that bees are finding homes in abandoned houses. Perhaps we have found a solution to the beat collapse. I should mention that one sentence suggests that many of the bees may be Africanized. If so, those bees may not be as welcome, because they would be illegal aliens from an undesirable continent. To make matters worse, people seem to be mixing these African bees with an American Queen and then releasing them on unsuspecting plants.

Juan Cole at http://www.juancole.com today posted a letter from an "informed reader" that makes some rather telling points about the supposed nuclear reactor that North Korea was supposedly helping Syria build that was bombed out back in September by the Israelis, and which the US CIA now claims was a reactor, although maybe, not necessarily, one to be used for weapons, with some crucial parts missing. The letter on Juan Cole makes the following further points.

The reactor design was supposedly based on the DPRK's Yongbyon, itself an old British design, and a "hunk of junk." Yongbyon uses lots of graphite. None reported from the area around the blast or of any moving into Syria. No evidence of boron-carbide or cadmium alloys that could be used for control rods. No reports of any missing uranium yellowcake to be used for fuel rods. Furthermore, the US knew there was construction going on at this site since 2001, but never asked the IAEA to carry out an inspection, even thought it also had known for some time that Israel had been plotting to hit the site. Syria has been a signatory of the NPT since 1969 in good standing (unlike Israel) and presumably would have responded favorably to an invitation for an IAEA inspection, or if it had not done so, that would have been a red flag. But no such move was ever made, and now we never will be able to find out what was really going on there or if the North Koreans really were involved (the CIA presentation's evidence for their involvement was one photo of a known North Korean with an unnamed man claimed to be a Syrian at an unnamed location at an unkown date that was supposedly provided by the Israelis, as were most of the photos used in the CIA presentation). So, this looks like a lot of phoney manipulation for purposes that remain unclear: pressure on North Korea, pressure on Iran, pressure to sandbag or enhance some secret negotiations between Israel and Syria? All are possible.

The idea that forcing elderly workers out of the labor market before the statutory age of retirement would provide jobs for the unemployed young has been for a long time widely accepted in several European countries, particularly in Belgium where indeed youth unemployment is particularly high both in absolute and in relative terms. For most economists and fortunately an increasing number of Belgian this view is based on the erroneous belief in a fixed amount of work. Economists call this allegedly widespread view the "lump of labor fallacy".No, the rationales I've heard for early retirement usually had to do with workforce reduction. Since layoffs would primarily affect the most recently hired -- and among them younger people -- the option of early retirement would thus presumably provide an alternative to layoffs, not a bonanza of job openings. The second rationale I've heard, though, does have to do with opening places for advancement of younger staff who otherwise have nowhere to go on the promotion ladder. So this early retirement business was not about some "erroneous belief in a fixed amount of work" but about coping with a declining amount of jobs or advancement possibilities in particular organizations.

I don't know if early retirement is an effective method for reducing a workforce while avoiding layoffs of workers without seniority. I would assume it depends on how it is implemented. But what is the point of assigning it some other purported purpose and then finding it didn't achieve something it was never expected to do?

Admittedly, the authors did cite a Belgian program that existed from 1983 to 1991 and that allowed a 5-year relaxation of the retirement age, without reduction of benefits, if the employer commited to replacing the retiree with an unemployed person receiving unemployment insurance. Such a program sounds like a bureaucratic nightmare but it wouldn't assume a fixed amount of work; it would prescribe a tit for tat. Some anti-dismissal legislation also allowed firms to lay off older workers provided they hired unemployed people collecting benefits. Same story. With only the authors' second-hand account to go on, those provisions sound more like loopholes with fig leafs than they do legitimate job creation strategies.

Those who make the fallacy claim fail to offer specific evidence of the supposed belief in a fixed amount of work. Yet it is too convenient to yield the burden of the proof on the advocates of the lump of labor fallacy. In our study we want to show that preretirement to make room for the young didn't work.

This is even more bizarre: if those who make the claim offer no evidence... CASE DISMISSED. If there's no evidence for the claim, there's no point in showing that a policy that, as far as we know, WASN'T based on the supposed belief may or may not have worked in accordance with that non-existent belief. If there's no evidence that X killed Y, there's no point to proving (or disproving) that it was in self defense.

Well, I'm glad to hear that. I wonder, though, if there isn't some minimum level of coherence that an argument should attain before being distributed by the International Monetary Fund? I mean, if those who make the claim offer no evidence, what is the point of proceeding (other than to lend spurious credence to a claim for which no evidence has been offered)?

To be perfectly clear, Sandwichman doesn't much like the idea of early retirement and doesn't see it as a feasible strategy for re-assigning jobs. But that lack of enthusiasm has nothing to do with anyone else's supposed assumptions about a fixed amount of work.

BUT the positive side to this dumb paper is the sentence, "Those who make the fallacy claim fail to offer specific evidence of the supposed belief in a fixed amount of work." That's a paraphrase of what the Sandwichman has been saying for 10 years! Some reviewer of the paper probably questioned the authors about evidence for the fallacy claim and they put that in as a "qualifying phrase" rather than throw out the whole paper just because it was based on a chimera.

Saturday, April 26, 2008

What follows is not an economic question.I have no expertise in genetic engineering, though I am a skeptic, worried about possible consequences -- and even more worried about corporations is having property rights in such matters.Here is the background to my question:

The biological literature is filled with stories of well-meaning people -- sometimes based on scientific studies -- introducing a new species in order to possibly modify the habitat.The Australian Cane toads are a case in point.

They are very successful breeders. Each pair of cane toads can lay 33,000 eggs per spawning (some published references estimate they produce as much as 60,000 eggs!).They are also an ecological disaster.

Genetic engineering seems to be somewhat similar to the introduction of new species, but on a far smaller scale.The technology began when the idea was common that each gene was responsible for a single characteristic.Now, people realized that the genome is far more complex than anyone had imagined.

My question is, do we have anything to learn from the experience with the introduction of invasive species?

Friday, April 25, 2008

Lost in the huffing and puffing over Obama's "bittergate" remarks on gun owners is the fact that he and the rest of the leading Dems have completely caved on the issue of gun control, much as they did on the death penalty after the disastrous 1988 prez race of Dukakis. After that Dem prez candidates had to show they could execute the young and mentally ill to get elected. Now there will be no more pushing for assault weapons bans, handgun restrictions, heightened gun registration, or anything else. West Virginia and other states that used to go Dem but went for Bush need to be fought for, and since Kerry's defeat it is clear that kowtowing to the NRA has been an aim of the Dems. (And, ironically, Kerry was a card-carrying NRA member and longtime hunting gun owner, but when he showed up shortly before the election in Ohio in a frou-frou designer hunting outfit, he might as well have bowled a gutter ball in Altoona and denounced xenophobia by rural religious gun nuts.)

So, in the awful ABC debate that also saw Hillary ready to defend the entire Middle East against Iran (or maybe Syria?), Obama agreed with the NRA position on the Second Amendment as it relates to the case before the Supreme Court about D.C.'s gun ownership restrictions. He said it guarantees an individual right to own guns, against the traditional interpretation that the Second Amendment is about a "well-regulated militia." In any case, even the slaughter at Virginia Tech last year has not moved the Dems (and certainly not blind duck Hillary) to push for what Hillary's husband got, restrictions on the most extreme of assault weapons. By my calculation if the madman at Virginia Tech had only had guns allowed during the 1990s, he would have been able to kill only about a third fewer than he did because of the fewer rounds of shots one can get off with those allowed guns. But, we cannot pursue such matters any more. The NRA and the gun nuts must be assuaged, even though I fear that is hopeless for Obama now.

Thursday, April 24, 2008

I've been thinking about an offer I made some three-and-a-half years ago, in October 2004, on MaxSpeak. At the time, a report on economic growth had just been presented to the French Finance Minister, Sarkozy, by Michel Camdessus, former head of the International Monetary Fund, in which it was alleged that advocates of reduced working time believe there is only a fixed amount of work to be done. That was, of course, the proverbial lump-of-labor fallacy claim, which I had disemboweled in an article published several years earlier. I offered $5,000 to anyone who could refute my refutation of the abominable strawman.

Of course there were no takers. But that could easily have been because I would have been the judge of whether any rebuttal was successful. Who could have trusted that my verdict would be impartial? After more thought, I've decided to raise the award to $10,000 and to establish an adjudication process untouched by Sandwichman hands.So here's the plan:

In the meanwhile, I've had a second article, "Why Economists Dislike a Lump of Labor" published in the Review of Social Economy. That article was motivated by irritation at the Camdessus report and several other dewy-eyed obeisances to the mythical fallacy claim, including one by the managing editor of the Journal of Economic Perspectives, Timothy Taylor (not in the JEP, though).

To qualify for the $10,000 prize, the candidate would need to write an article refuting the main conclusions of my September 2007 article and have it accepted for publication, as a peer-reviewed article, in one of the 30 top-ranked economics journals. Now, admittedly, that's a pretty tall order, so I would also offer a $1,000 consolation prize for a refutation published in one of the economics journals ranked 31-159. The point is that the so-called "best-known fallacy in economics" should be worthy of a publishable peer-reviewed full-length explication or it's bullshit. I say it's crap. I've shown it to be crap. And I'll put my money on it that it's crap.

Wendell Berry has an essay in the May Harper's Magazine, "Faustian Economics: Hell hath no limits." The concluding paragraph reads, in part:

"Whichever way we turn, from now on, we are going to find a limit beyond which there will be no more. To hit these limits at top speed is not a rational choice. To start slowing down, with the idea of avoiding catastrophe, is a rational choice, and a viable one if we can recover the necessary political sanity."

I glanced at the title and on the way home, before reading Berry's essay, was thinking about those limits Hell (and growth economics) hath none of. Closest to home for me is the "only so much work to go 'round" of the infamous lump-of-labor fallacy. "Sharing the work" has always only one side of an equation the other side of which was limiting the hours of labor. English factory inspector, R.J. Saunders, observed in 1848, "Further steps toward a reformation of society can never be carried out with any hope of success, unless the hours of labour be limited, and the prescribed limit strictly enforced.

For some reason, something that an English factory inspector had the temerity to suggest 160 years ago, when the condition of the working class left a whole lot to be desired, is something most Americans know they "just can't afford" today. I don't get it. Unless it's a case of that knowledge without wisdom, which, to quote Berry paraphrasing John Milton's Archangel Raphael in Paradise Lost. "is not worth a fart..."

I’ve started working on a project related to the Western Climate Initiative, a process underway between seven US states and two Canadian provinces to put this scenic portion of the planet on a carbon budget. Because of this, I’ll be posting more frequently on topics related to climate change and how to limit it. Right now, I’m thinking of the decision to commit the WCI as a whole to auctioning only a portion, between 25 and 75%, of the carbon permits they intend to issue, distributing the rest gratis. Isn’t it generous to be handing out free money to the most polluting businesses?

Of course, it’s difficult for the general public to see just what’s going on. To remedy this, I propose the following: auction all the permits. Then take some of the money, between 75 and 25%, and deliver it to the doorstep of firms that emitted the most carbon in the past, preferably in suitcases with unmarked bills.

Maybe if you put the whole operation on YouTube people would get the point.

Wednesday, April 23, 2008

I know something about this demographic; they are my relatives: my parents are both Irish catholics from Philadelphia, both first-generation college and thus able to get out. And I'll tell you something about the people they left behind: they're not voting overwhelmingly for Hillary becuse they like her policy ideas. They're voting for her because she's white.

Monday, April 21, 2008

How is it that the bastards that run the country are able to turn their mistakes into opportunities? Energy shortages demand the elimination of environmental restrictions. Food shortages demand more GE crops. The housing crisis requires tax cuts for corporations.

Nothing for the people who are being plowed under by the crisis. All we have to show for our troubles is Obama and Hillary.

I would have signed that letter complaining about the questions asked by ABC's Gibson and Stephanopolous if someone had asked me to. However, they may have done Obama a favor in the end by giving him a dry run with this sort of trivial stuff, which the Republicans will surely hit him on hard in the general election (although it is my understanding that John McCain does not wear flag lapel pins much more than Obama does, although clearly he can get away with that better than Obama).

No, the much bigger problem with the debate was Stephanopolous asserting (in contrast with the US NIE finding unanimously agreed to by all 18 US intel agencies) that Iran is pursuing nuclear weapons and asking the Dem candidates what they would do about it. Neither called him on what garbage this assertion is, especially in light of the fatwa against nuclear weaons by Vilayat-el-faqih and Commander-in-Chief of the Iranian military, Ayatollah Ali Khamene'i. Instead they both declared how much they opposed this by Iran and supported defending Israel on the matter, although Hillary went much further than Obama, proposing a defense shield over all of the Middle East, something beyond anything advocated by either Bush or McCain. I observe that about the only media people to note the extreme nature of this declaration were Rachel Maddow and Patrick Buchanan on Olberman's show. This is far more appalling and serious than all the dreck posed in the first 45 minutes.

Friday, April 18, 2008

Since climate change and financial meltdown aren’t enough for us, we’ve been handed a third crisis, the explosion in global food prices. Hunger is now, famine looms in the future.

There are two broad views of the problem, epitomized by two of this morning’s readings. Marc Lacey, reporting in the New York Times, tells us that poor Haitians are eating mud, the final link in a chain that begins with rising demand from China and other expanding economies, declining output due to drought and disease and the diversion of cropland to biofuel production. Meanwhile James Hamilton, over at Econbrowser, shows that a basket of commodities, including not only basic foods but also minerals and oil, has been rising more or less in tandem, suggesting that a financial mechanism is at work. Who is right?

Let’s take the mainstream view first. There are three proposed factors, one on the supply side and two that show up on both demand and supply.

Let’s start with supply. It continues to rise overall at the rate of about 2.5% per annum, although there are much publicized crop failures in rice. At least in the case of Australia, the collapse of rice production is the result of drought, presumably attributable to early effects of climate change. Even though this is not a principle cause of the current global crisis, if Schlenker and Roberts are right, we should be very worried about the future. (I should add that my own view, based on long run considerations concerning pest and pathogen evolution, soil quality and water mining, is that industrialized agriculture is still an unproven experiment.)

The uptick in demand is seen as resulting from economic growth and competition between food and biofuels, although both may also show up in reduced supply numbers. The first of these can be described as the conversion of hundreds of millions of formerly poor people, in China, India and parts of Latin America, into middle-class food consumers. Hamilton dumps on this, saying (of commodities in general):

I also find it implausible to attribute the commodity price increase to a surge in demand. The economic news over the last three months has been very convincing that output is slowing, not accelerating.

He may be right about other commodities, but, in the case of food, the issue is the shift from direct grain consumption to meat, which has the potential to increase total demand far more than simply piling a little more on the plate. There are important threshold effects at work, so simple linear relationships between aggregate income and meat consumption will not necessarily capture the dynamic. While George Monbiot places great stress on diet, and rightly so, it is also the case, according to the FAO, that use of grains for animal feed is not rising faster than supply. Diversion of land for pasture would be another factor to consider, but it would show up on the supply side.

Competition with biofuels is just beginning and currently has a small effect on global demand, less than 5% of total output based on direct use but not diversion away from cereal production (as in Brazilian cane), which impacts supply. Biofuels are growing very rapidly, however, and may be significant at the margin, since, with inelastic demand in the short run, small shortages can give rise to large price spikes.

Now consider Hamilton’s case, which parallels Jeffrey Frankel. It rests on the following diagram, for which I am very grateful.

If all storable commodities have trended upward, we should look for a common cause and not get bogged down in the individual factors affecting each (which may nevertheless tell us why some are surging faster than others). His candidate: all of them are attractive stores of value in a world in which short term interest rates, in the US at least, have turned negative. This is plausible, although I would add that this argument should be examined in dynamic terms. At any point in time, a movement of real interest rates deeper into negative territory should result in a one-time increase in commodity prices. (This underlies Hamilton’s suggestion that the Fed confound the markets and refuse further cuts in the fed funds rate, which would permit a real-time experiment.) But a continuing trend toward higher commodity prices implies either a continual process of asset switching or a continual increase in funds chasing assets or both. The first, according to Hamilton’s logic, would arise if interest rates were falling over time. The second, which interests me, implies that some of the funds that have previously inflated bubbles in mortgage-backed and other dollar-denominated securities are now finding their way into commodities. I repeat: the sovereign recycling of dollars on the capital account has to find assets, and, since the flows are not based on profit expectations, they will push the prices of the assets they end up in beyond their reasonable fundamentals. (Yes, profit expectations can also be wrong, but sovereign recycling doesn’t even try to be right.) If this is happening with food it is a very, very big deal.

So where are we at? As always, we need more data. The asset-switching hypothesis really does need to be tested, pronto. The biofuel diversion is politically driven and can be stopped in its tracks if Washington and Brussels will it. In fact, I am worried that, as fuel prices increase in the years to come, simply ending biofuel mandates and subsidies will not be enough; we will need to install roadblocks. George Monbiot is right: we should eat less meat and be willing to pay more for it, as meat is shifted to marginal cropland and small niches in the farm production system. Above all, subsistence in a resource-scarce world will always be a problem when global income is distributed so unequally: the Gini coefficient for global income distribution is about .65, higher than in any single country, as Milanovic has shown. The spread of hunger in a world with so much wealth should tell us, in a blunt way, that we have a social justice problem.

In the very short run, the rich of the world should pony up and help feed the poor.

K. Thomas Varghese died this week, my old friend and former colleague from the Department of Economics at James Madison University here in Harrisonburg, Virginia. What is below the fold was written about him. Once upon a time, he really did carry a maybe message concealed in his shoe across a difficult border at considerable personal peril. He was a man of courage and honor, and I and my wife, Marina, will miss him and always remember him with fondness and gratitude. Rest in peace, Tom.

The Maybe Messenger

The maybe messenger with the maybe messageTravels by bus, he travels by plane,He travels by boat, he travels in the mindOf the sender of the maybe message.

Why do they wait for the long messages?They are the ones with no conclusions.They are not epitaphs nor epilogues,But the dappled points of the maybe saga.

"It is just a movie," say the children,Of the maybe saga and its manifestations.But who is the director, the producer?Does the State license the studio?

The interior monologuist mumbles his maybes.The reels clatter in the movie theater of his mind.It has all been taped and red taped,And the critics know an unlikely story when they see one.

"There is never enough time," say the actors."There is too much time between the time," they say.Where did they learn their lines?Was the scriptwriter shot after his many awards?

If he were here he could speak to the nameless committee,The one that decides on the final editing,Was the maybe message a script revision?Or was it merely a small portion of the script?

They attempted to understand in the subcommittees,They became subconscious of the maybe message,Perhaps it would be waylaid and misplaced,Lost in the subconscious subcommittee's sublimations.

Buses break down and planes crash.Customary entries can be revealing and less.All of this and more makes the maybe message maybe,All of the intervening meaninglessness of loss.

But at its core it is not a maybe messageIt is only the means and not the endsThat are in dispute, the endless wranglingsOf the subcommittees of the self-appointed.

"They are nice guys who understand love," says one."They are omnipotent and omniscient and will get you," says another.And these would agree in policy, it appears.The nameless committee leaves the cuttings on the floor.

The maybe messenger treks a pilgrimage from India.The tears of Moscow mights wash their dreams.They know the dream of love drives their movie.The maybe message is a footnote to their waiting.

You’ve heard this one: A terrorist is being held captive. He knows where a bomb is scheduled to explode in a few hours, one that would kill thousands of innocent victims. Is it OK to torture him to get the information in time to defuse the bomb? But I don’t want to argue about that one again. Try this:

You are being held captive by a foreign power. Although it is a mistake, your captors honestly believe that you are a terrorist and know where a bomb is scheduled to explode in a few hours. Is it OK for them to torture you? (Cap tip to John Rawls.)

Thursday, April 17, 2008

David Leonhardt's column yesterday discusses a new paper by Wolpers and Stevenson that claims to debunk the Easterlin paradox. The paradox was that despite an association between income and reported happiness in cross-sectional data, in the time series big increases in income did not increase average reported happiness. An obvious interpretation is that people care about relative, not absolute, income. I have to get the paper, but from Leonhardt's account, I wonder if it answers what to me is the larger point of Easterlin and Easterlin-spawned work: that relative income matters.

The column includes a graph that shows a positive correlation between income and happiness across countries. What I want to know - I have to get the paper - is , granting that the correlation is positive for a particular country's time series, not zero, as Easterlin found, whether the correlation in a cross-section is stronger than in the time series - whether relative income matters at all. The idea that only relative income matters, that absolute income matters not at all, was never very plausible.

Got to go: I'm bitter and angry and dodging sniper fire, can't seem to find my flag lapel pin, trying to find a weatherman to see which way the wind blows, and damn if isn't Spring in poor old Northwest Ohio!

The corporate love of buying back stock -- which Wall Street encourages as much as it can -- reached new heights late last year. Standard & Poor's, which has been tracking buyback data for the S.&P. 500 since 1998, reports that in the fourth quarter of last year, companies in the index had net reported profits of $68 billion -- and spent $141 billion buying back stock. That was the first quarter in which the companies managed to spend double their net income in buybacks. The third quarter of 2007 had been the first time that buybacks exceeded profits for the companies.

With that surge, 2007 goes down as the first year in which buybacks exceeded profits for an entire year. The major companies of America, as a group, are acting as if they are in liquidation and have few good investment opportunities.

In the fourth quarter, profits were down 62 percent from a year earlier, and share buybacks were up 35 percent. Howard Silverblatt, S.&P.'s keeper of the numbers reports that over the last 13 quarters, since the buyback boom started in the fourth quarter of 2004, the companies in the index reported net earnings of $2.1 trillion. They paid out $721 billion in dividends and spent $1.4 trillion in buybacks. Their total capital spending came to $1.6 trillion.

Companies -- the non-financial ones, that is -- still have plenty of cash, so Mr. Silverblatt thinks buybacks will continue at a high level, although not as high as in 2007. One reason for buybacks is to avoid dilution of earnings from the exercising of stock options. Another is to boost reported earnings per share.

Today's Wall Street Journal also has a piece that mentions the aging of the U.S. airlines' planes. I wrote a book almost 20 years ago that discussed how Keynes neglected replacement investment. Keynes, Investment Theory and the Economic Slowdown: The Role of Replacement Investment and q‑Ratios (NY and London: St. Martin's and Macmillan, 1989). Financialization has greatly compounded the problem. Here is an extract from the article:

Delta has roughly 119 gas-guzzling McDonnell Douglas MD-88s with an average age of 18 years, and Northwest has a fleet of more than 90 Douglas DC-9s with an average age nearing 40 years old. During the past three years, the bulk of the U.S. airline industry has sat largely on the sidelines while carriers from the rest of the world placed roughly 7,000 orders for the newest, most fuel-efficient jets. As a result, both Boeing and Airbus are largely sold out of planes until at least 2012.

Regarding the question savings glut versus investment scarcity, a week ago, I wrote to the Washington Post journalist, Steve Mufson, asking how long he thought that Exxon's stock buybacks exceeded real investment. He told me he thought it was as long as he was covering the subject -- a couple of years. Today, the Wall Street Journal has a nice piece showing the data with a remarkable upward trend in stock buybacks.

All this is further evidence of this corrosive dominance of financialization.

In 2007, Exxon spent 5.3% of revenue on exploration and capital outlays, down from 6.5% in 2003. The actual dollar amounts did increase, to $20.9 billion from $15.3 billion. But they didn't keep pace with Exxon's overall revenue growth, let alone soaring oil prices. Crude climbed to about $92 from $34 a barrel during that period. Meanwhile, the Irving, Texas, oil giant poured cash into stock buybacks. In 2007, Exxon repurchased $31.8 billion of its shares, up five-fold from the amount acquired in 2003. That activity helped earnings per share. It didn't increase oil output.

Tuesday, April 15, 2008

Tomorrow (April 16) is the first anniversary of the massacre/suicide at Virginia Tech. While moves have been made to restrict access to guns by the mentally disturbed, no other such moves have been made in Virginia. People like John Lott oppose such moves, arguing that allowing people to carry guns on campuses and in other public places reduces homicides (Lott has also been dumping on Obama for his supposedly bitter unhappiness with gun ownership). The data on that is a mixed bag, but another aspect of this is much clearer and a part of the VA Tech story, the very strong link between gun ownership rates and suicide rates within the US. It is just a lot easier to kill oneself if there are lots of guns around, and one does not have a chance to second guess one's intention.

I have done some digging around and guesstimate that if the US as a whole had the gun onwership rates one finds in the lowest states, we would see on the order of 10,000 fewer suicides per year in the US. That is more than the total killed on 9/11 or US military killed in Iraq. Here is a sources on suicide rates: http://www.suicidology.org/displaycommon.cfm?an=1&subarticlenbr=21. Here is a source on gun ownership: http://www.swivel.com/data_sets/show/100359. The five highest states in gun ownership are Wyoming, Montana, South Dakota, West Virginia, and Idaho. The highest states in suicide rates are Montana, Nevada, Alaska, New Mexico, and Wyoming. The five lowest states in gun ownership are D.C., New Jersey, New York, Rhode Island, and Massachusetts. The five lowest states in suicide rates are D.C., New Jersey, New York, Massachusetts, and Rhode Island.

John McCain wants the federal government to free people from paying gasoline taxes this summer and ensure that college students can secure loans this fall, a pair of proposals aimed at stemming pain from the country's troubled economy. At the same time, the certain Republican presidential nominee says Democratic rivals Barack Obama and Hillary Rodham Clinton would impose the single largest tax increase since World War II by allowing tax cuts pushed to passage by President Bush to expire." Both promise big 'change.' And a trillion dollars in new taxes over the next decade would certainly fit that description," McCain said in remarks prepared for delivery Tuesday. "All these tax increases are the fine print under the slogan of 'hope:' They're going to raise your taxes by thousands of dollars per year -- and they have the audacity to hope you don't mind." That was a play on the title of an Obama book.

Greg calls this news bad news for the Pigou Club. It certainly represents McCain’s desire to pander to the average Joe. But shouldn’t we remind McCain of something Milton Friedman said: “to spend is to tax”. McCain just wants to have more deferred taxes in the form of continuing high Federal deficits. I know this is the modern GOP playbook to winning elections, but it is a terrible way to run a nation’s finances.

Update: Greg in an update brings us an analysis from Len Burman and Eric Toder that notes that suppliers would capture most of the gasoline tax reduction with little accruing to consumers. Jared Bernstein agrees:

the gas tax holiday is smart politics but lousy policy. As Taplin aptly described, high gas prices are sending an important economic signal and jamming that signal is ill-advised. On the other hand, as one of the commenters points out, this idea could really help some strapped families. The problem is there's absolutely nothing to stop the oil companies from claiming a big chunk of this subsidy by raising the pretax price of gas at the pump. Prices go up in the summer anyway, and I'll bet you a gallon of premium that they go up even more than usual, such that some of that 18.4 cents/gallon ends up back in Exxon's wallet, not yours. Which leaves us with a nice little transfer from taxpayers to oil companies. Nice work, John.

Jared discuss other aspects of McCain’s fiscal proposals that we should really worry about.

Sunday, April 13, 2008

the emerging world’s savings surplus stems from a “glut” of savings, not a “drought” of investment. In 2007, the savings rate of the emerging world savings was almost 10% of GDP higher than its 1986-2001 average. Investment was up as well – in 2007, it was about 4% higher than its 1986-2001 average. However the rise in the emerging world’s savings was so large that the emerging world could investment more “at home” and still have plenty left over to lend to the US and Europe. That meets my definition of a “glut.”

But this is not precisely the same as Bernanke's global savings glut – even if Brad tried to equate them as a follow-up to a comment. World savings and investment averaged 22.4% of world GDP over the 1986 to 2001 period. For the 2002 to 2004 period, world savings and investment dipped below 22.4% of GDP. Recently, world savings and investment relative to GDP have increased. If we look at savings and investment as a percent of GDP for the advanced nations, we see a decline in both – especially savings. The bottom line seems to be that the emerging and developing economies have been net lenders, while the advanced economies have been net borrowers with the U.S. leading the way in running current account deficits.

Brad continues:

I don’t think it entirely implausible that savings rates in both Asia and the Middle East might start to converge toward their long-term average. What goes up sometimes also comes down. An end to the emerging world’s savings glut would not be such a bad thing either. It would mean than the young and poor were supporting global demand growth – not the old and rich.

In other words, world consumption demand is likely to rise as Asia and the Middle East start to consume more. If Brad’s prediction is borne out, it will likely have two effects. One is that interest rates will rise unless we undergo another world investment decline. The second is that the U.S. will likely see more exports and hence a lower current account deficit.

Saturday, April 12, 2008

The two of us are among the conservatives who have proposed a tax reform that permanently reduces tax rates on capital gains, dividends, and estates, cuts the top income-tax rate and the corporate-tax rate, and abolishes the alternative minimum tax on individuals … Entin makes two objections to the plan. The first is that it raises marginal tax rates for some people. But almost every tax-reform plan raises tax rates for some people. Many supply-siders have long sought a flat tax of 17 percent. That proposal has many excellent features, but it would raise marginal tax rates on most taxpayers. We don’t recall Entin ever raising his voice against the flat tax for that reason. The question to ask about a proposed tax reform is not whether it raises tax rates for anyone, but what its net effect is. Our plan reduces the most damaging marginal tax rates. As under the flat tax, some people will see their rates rise, but the plan as a whole is both pro-growth and pro-family. Entin’s second objection is to the plan’s centerpiece: a large expansion of the child tax credit. We believe the credit should be bigger, should be applied against payroll taxes as well as income taxes, and should be available to all taxpayers (with no high-income phase-outs).

At least they're not delusional, like the tax-cuts pay for themselves crowd, and honest enough not to skirt the issue. But since this tax scheme is intended to help Paris Hilton, if marginal taxes for some people have to be raised, well, its quite likely that the some people who will get a tax hike are going to be more janitor-ish and less Paris Hilton-y. Anything else defeats the purpose of the rest of the tax scheme. Look for a hefty increase in the lower marginal tax brackets.

The tax reform proposal that Ramesh Ponnuru and I have outlined would be substantially more progressive than the current tax code. It would also be substantially more progressive than the system under President Clinton. This is true whether one uses our framework to lower overall taxes or maintain revenue neutrality. We would enhance progressivity in three ways: First, we would provide a $4,000 tax credit per child that would be refundable versus both payroll taxes and income taxes. Second, although we would reduce the top marginal income tax rate, we would let the new lower rate kick in at a lower level. As a result, people in upper income brackets would end up making much higher overall tax payments despite facing a lower top marginal rate. Third, we would alter the mortgage interest deduction and charitable donation to make it available to more middle and lower income taxpayers (while less generous to the upscale) while getting rid of other itemized deductions that are predominantly used by upper income taxpayers. On net, almost everyone now in the 15% bracket or below would pay less in taxes. For those now in the 25% bracket or above, their aggregate taxes would go up, although (in general) not when they have children ages 0-18, and their top marginal rate would decline.

The rich and the poor both pay less taxes? Wow – this sounds like the George W. Bush tax cut – which was NOT fiscally neutral. I guess one could design such a tax proposal but that would basically be one that screwed the middle class. Here’s my bottom line – reducing taxes on capital income would require increasing taxes on employment income if fiscal neutrality is to be maintained. That sounds regressive to me. Of course, Stein’s claim that his proposal is fiscally neutral appears to be suspect.

We’ve seen supply-siders make these claims before. They often claim that reductions in taxes on capital income can increase tax revenues and benefit the poor. Usually their claims are not supported by a real analysis. If someone knows if anyone has analyzed the Ponnuru-Stein proposal, I’d love to see the results.

Friday, April 11, 2008

Yeah, that is me, tomorrow, April 12, 2008. No, I do not feel it. But I know that I will no longer be able to consider myself unequivocally "middle-aged" (and I remember thinking that being middle-aged was not so great).

I note for those who are interested that 60 is the Big One in Chinese Taoism, where the usual 12-year cycle of years being associated with animals (this is the Year of the Rat, my year) is compounded by there being 5 of these, each associated with an element, like earth, air, water, and fire (do not remember what the fifth one is for the Chinese). So, the whole thing comes back around after 60. Indeed, each of the 60 years has a specific deity associated with it. I saw all 60 depicted in a Taoist temple in Souzhou, China a few years ago, some smiling, some ferocious, most looking pretty human, but some rather fantastic. Anyway, there are 60 of them, and the one I was born under is back again.

Wednesday, April 9, 2008

President George Bush has one major policy victory for which he has not received sufficient credit. Illegal immigration has been one of the most contentious issues in American policy in recent years. Brilliant minds have tried to put together some compromise that would stem the flow of illegal immigrants.

But President Bush has developed a policy that has proved effective -- a policy that no one had even considered. The Wall Street Journal today reports that illegal immigration has suddenly dropped. By reducing the number of domestic jobs, President Bush has cut of illegal immigration at its source -- the economic equivalent of the Gordian knot.

Other less enlightened people tried to develop policies to increase the number of jobs, but only Bush realized that employment has pernicious effects, earning him an exalted place in the Pantheon of economic policy.

It is scandalous that nowhere in what passes for mainstream macroeconomics will you find anything that helps you understand what Hyman Minsky called "financial fragility" - the inherent instability of the credit system - and the implications for the real economy. No models - nothing!! - Nothing in a macroeconomics textbook that would aid in understanding the current crisis, and countless previous cises in the history of capitalism, therefore. Here is an exception which miserably confirms the rule: in Mankiw's intermediate level text, he gives passing mention to Fisher's debt-deflation account of the Great Depression. But the key insight of Fisher's article (not by any means original to him - see Hawtrey, Marx and others) , i. e., the self-amplifying nature of credit expansions and contractions - is not mentioned at all. Instead, Fisher chez Mankiw is made to say that Fisher saw falling prices redistributing wealth from debtors with a high marginal propensity to spend out of wealth to creditors with a low marginal propensity to spend out of wealth, thus reducing consumption. And that's it. It would be funny if it weren't so sad.

Tuesday, April 8, 2008

The Sandwichman continues to ponder how the Big Lie works as a message. Exhibit "A" is "More Doctors Smoke Camels than any other Cigarette." Let's begin from the premise that the relative popularity of cigarette brands among medical professionals is not really the issue. I mean, who cares? But is the insinuation that "cigarettes are good for your health" at all believable? Was it ever? I suspect not.

The clue to how the Big Lie works may lie in the very unbelievability of the message.Adolf Hitler had something revealing to say about this in Mein Kampf. He talked about how people eventually "submit" to the repeated propaganda message. They don't come to believe it. They simply give up.

But what form might such submission or surrender take?

Here's my hypothesis: when subjected to a repeated, patently unbelievable message people eventually come to discount and ignore the message. But they don't do so with a great deal of precision. Instead, they tend to put up a mental screen that blunts the propaganda message by indiscriminately also shutting out "similar" messages on the same general topic -- including the countervailing message that smoking is bad for you. Of course this filtering would be most effective if it also enabled people to ignore unwelcome information. Thus the take away from "more doctors smoke camels" would be "don't pay any attention to evidence that smoking is bad for you."

"More debt! Let's party!" "Maybe we should stop looking for ways to keep moving at locomotive speeds. Take a walk for a while." "So, the levees have failed and flooding has ensued. Your plan is to pump like mad then rebuild in the same place." "But what is really appalling and scary is that the best answer you and others can come up with is 'go out and spend' until we find the next locomotive." "The commodities price run up is far more than the effect of speculation, but rather an indication that the world economy is straining against fundamental physical limits." "New times ahead, not more of the same with variations."

Can you say "paradigm shift"? But wait. There is a Keynesian cure available. The ultimate solution put forward by Keynes and identified by him explicitly as one of three essential "ingredients of a cure." Why do our self-styled Keynesians insist on restricting their policy too kit to only two of those three ingredients and eschewing the third and ultimate ingredient?In a letter to the poet, T.S. Eliot, dated April 5, 1945, John Maynard Keynes identified shorter hours of work as one of three "ingredients of a cure" for unemployment. The other two ingredients were investment and more consumption. Keynes regarded investment as "first aid," while he called working less the "ultimate solution." A more thorough and formal presentation of his view appeared in a note Keynes prepared in May 1943 on "The Long-Term Problem of Full Employment. In that note, Keynes projected three phases of post-war economic performance. During the third phase, estimated to commence some ten to fifteen years after the end of the war, "It becomes necessary to encourage wise consumption and discourage saving, –and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."

Krugman, April 8: "Cheap food, like cheap oil, may be a thing of the past."Sandwichman, February 18: Every kind of planted crop has increased in price by 30% to 50% over the past few months. This will have a huge impact on food prices.

There is an old wisecrack that "If s/he is laid off, it is a slowdown; if you are laid off it is a recession, and if I am laid off it is a depression." In this regard, I am now feeling the recession. While visiting her in the San Francisco Bay area, my oldest daughter, Meagan, a 36-year old single mother with a three year old son, was laid off from her CA-state paid job as a counselor to disturbed teenagers, this following nearly being evicted when her landlord was foreclosed on and was evicted after his subprime mortgage (obtained in 2005) was reset, on top of which her car went blooey while we were there (I have just returned to Virginia). Weird that these days local government jobs are among those most vulnerable in the current downturn, although that sector of government has always been more pro-cyclical than the federal government.

Ironically, besides visiting family members, I was also there to attend a conference at the San Francisco Fed (Society for Nonlinear Dynamics and Econometrics). The redoubtable Jim Hamilton of econbrowser gave a talk (summary figures available at his blog) on state diffusion of recessions. The last two have followed different and interesting patterns. The word on the current one is that while some states are being hit harder, they are all going down simultaneously, no diffusion from state to state, with him saying it hit in last quarter, after a deceleration beginning in second quarter last year. Oh yes, I also heard that at least at the FRBSF they do not use the word, "recession." The preferred term is "adverse economic conditions."

Monday, April 7, 2008

In the 1940s, the RJ Reynolds tobacco company conducted an ad campaign featuring the slogan, "More Doctors Smoke Camels than any other Cigarette." I would like to suggest a thought exercise that focuses on the peculiarities and strategems of that slogan. We could call this game "more economists smoke free enterprise than any other paradigm."What can be learned from playing such a game? First, the importance of distinguishing between number, fact, truth, authority, image, assumption and innuendo. Second, the difficulty of criticizing a discourse that glides heedlessly from one kind of claim to another. The discourse in question isnt "medicine" or "economics" per se -- it just plays one on TV. Finally, I would like to offer the observation that it is precisely the agility of the pseudo-economic discourse in evading such a decisive critique -- rather than any specific error -- that marks economics itself as "unscientific".

In the Camels ad campaign, it was claimed that a nationwide survey of 113,597 doctors asked, "what cigarette do you smoke, Doctor?" The number is audacious -- as if it would not be enough to say "more than 100,000 doctors." Ah, if measurement be the food of science, count on the unrounded sum to be an unquestionable scientific fact indeed. According to Jackler and Proctor at Stanford School of Medicine, though, RJ Reynolds's surveyors handed out cartons of Camels at AMA conventions and then asked recipients what brand of cigarettes they smoked. Based on such a deliberate sample bias, the resulting number doesn't constitute a credible "fact".

But that's beside the point. What if more doctors did indeed smoke Camels? So what? The ad isn't just reporting a concocted fact. It is trading on the popular image of the medical doctor as a scientific, but at the same time, sympathetic and avuncular authority figure to produce the innuendo that if HE smokes Camels (in the iconography of the ads, doctors are almost exclusively male) then it must be GOOD FOR YOU.

The corresponding swindle relating to economics takes place outside of economic theory proper. When economists use theoretical abstractions in constructing their models, such as a perfectly competitive market, they are not necessarily claiming any such thing exists (or ever could exist) in the real world. Apologists for economic privilege, however, like to pretend that establishing free markets is a simple matter of "government getting out of the way." Left unsaid is that such magic inevitably requires that government first construct the very way that it is then supposed to get out of. The only thing in common between the economists' abstraction and the political propagandists' holy grail is the name "free market". Economics doesn't necessarily confuse the two. But all too often economists themselves and the economics profession as a whole honour those who do conflate glib apologetics with economic theory and marginalize those who criticize such obfuscation.

It is as if doctors and the medical profession were to smile benignly on the Camel ads, damnable innuendo and all... which, in effect, they did. According to Jackler and Proctor, the Camel ads appeared regularly in medical journals such as the Journal of the American Medical Association. R.J. Reynolds conducted its bogus surveys from booths at AMA conventions. Presumably, the medical profession didn't strenuosly object to the Camel ad campaign because the ads presented a flattering image of doctors as scientists and humanitarians. In the end, though, it was medical researchers and doctors who established the undeniable link between smoking and cancer. The Stanford Medical School hosts a fascinating and enlightening exhibit, "Not a cough in a carload: images from the tobacco industry campaign to hide the hazards of smoking."

Meanwhile, the economics profession continues to sanction or tolerate images and innuendo about economics that are not only at odds with "the facts" but are patently false, misleading and toxic. When a critic points out some glaring discrepancy of method or assumption, it is always possible to find a counter example. Not all economists, for that matter, "smoke free enterprise". But enough of them do to send up a toxic cloud of confusion and complacency.

Is it accidental that the most enthusiastic "smokers" among economists are often high-profile public personalities? One might even suspect they rise to prominence because they espouse a well-funded ideological position -- poster boys and girls for the "scientific credentials" of their sponsor's political slant on economics. "Doctors smoking Camels" tarnished the integrity of a medical establishment that condoned the fraudulent use of their professional image. "Economists smoking free enterprise" is no less worthy of ridicule.

Friday, April 4, 2008

An article today in the front page of the Sacramento Bee's business section quotes a director of a community development fund it works in low income neighborhoods on the subprime crisis: "I want to know how many people are going to jail."

At the same time, Jeffrey Skilling, late of Enron, judging from what I read in the papers, seems to have a shot at getting out of jail.

I do not know much about the risk that JPMorgan Chase is taking on over and above the first billion dollars. But if the Bear Stearns bailout is not a gift to JPMorgan Chase, then it is certainly very charitable towards the people who let money to Bear Stearns. Were they widows and orphans?

Thursday, April 3, 2008

Awhile back, there was a lot of controversy about whether or not the U.S. is in a "recession" at present. Officially, we're not (as far as we know) while most economists now seem to think that the current period will be likely to be dubbed a recession when the NBER gets around to it. Most of the non-economists seem to thin we're in one.

One generally-ignored dimension concerns the actual definition of a "recession." The "official" definition of a "recession" comes from the very-mainstream National Bureau of Economic Research's Business Cycle Dating committee. Journalists summarize their (relatively complex) definition by saying that having real GDP fall during two or more quarters in a row defines a recession.

The problem with these definitions -- especially the journalistic one -- is that the emphasis is totally on production sold through the market. That's what GDP is all about, and no more. This might be thought of as a totally capitalist definition of a recession. Most workers, on the other hand, instead care about the growth of paid employment, i.e., the availability of jobs. So I decided to find "employment recessions" in the U.S. since World War II. As I define these animals, these are quarters where employment figures fall for two or more quarters in a row.

This is like the standard journalistic definition of a recession in terms of ease of calculation. The the NBER one is so hard to calculate. That version also reflects employment measures, I believe. My version also coincides with the common or "oral tradition" idea of a growth recession, in which GDP growth slows but does not turn negative, hurting employment.

I added one adjustment: the fall of employment is measured relative to the trend growth in employment in order to get a sense of the cycle, not the trend. (The trend rate has been falling over the decades, but that's another topic.)

1) There are several employment recessions that do not coincide with NBER recessions: in 1951/2, late 1959, late 1962, and early 1986. Somehow these receive much less press than the official ones do.

2) Employment recessions often begin before NBER recessions: in early 1957, late 1979, early 1981, early 1990, late 2000.

3) Employment recessions almost always end after NBER ones. The exception was in 1980. (It's possible that President Carter, who was running for re-election, begged Volcker to cease and desist.) This problem has gotten worse, with the "jobless recoveries" that followed the two Bush recessions that have occurred so far.

4) We're already in an employment recession, starting in the fourth quarter of 2006.

Here's The Complete List. Since 1951, we get the following "employment recessions" listed by year/quarter: dated by start and finish. In each of these quarters employment fell relative to trend growth, either preceded by or followed by another fall in employment relative to the trend. Note: the measures do not indicate the _depth_ of the employment recession, only its length.

1951/3 - 1952/3 -- does not coincide with an NBER recession.

1953/2 - 1954/4 -- coincides with an NBER recession, but ends two quarters after it.

Tuesday, April 1, 2008

I usually do not appreciate when people send me a video clips. This one was an exception. It takes about 10 seconds before the humor becomes apparent. Please do not get impatient if you watch it, because, besides being humorous it is an interesting commentary on the economy.